Company Perspectives:

Our commitment to total quality is shaping the future of food production. Food production has entered a new era, and Premium Standard Farms is leading the way with new methods that manage all aspects of pork production, from the farm to the dinner table. The unique Premium Standard Farms process is based on standardization throughout our organization. Because we manage all aspects of production, we are able to guarantee the highest quality, premium taste and superior value. Since 1988, Premium Standard Farms has been combining the best science and technology with the best people in agribusiness, resulting in consistently leaner, more nutritious and more flavorful fresh pork and pork products. We see tomorrow's challenges as opportunities for growth as we continue to supply our customers with the very best pork.

Company History:

The third largest hog farmer in the United States, Premium Standard Farms, Inc. (PSF) oversees two hog operations--one in Missouri and the other in Texas--that represent the most comprehensive, technologically sophisticated pig farms in the country, guiding the animals from birth to slaughter to individually packaged pork products. PSF established its first pork production operation in Missouri, where the company built state-of-the-art feed mills, hog barns, genetic engineering facilities, and processing and packaging plants, endeavoring to bring vertical integration to the pork industry. To pay for the equipment and facilities, PSF relied on its majority owner, investment bank Morgan Stanley & Co., which invested and raised roughly $500 million to make PSF the elite pork producer in the United States. Expansion carried the company into Texas, where a pork production operation equal to the size of the Missouri operation was established, but depressed hog prices and soaring corn prices during the mid-1990s led to the company's collapse. In July 1996, PSF declared bankruptcy, emerging from court protection two months later. In 1998 the company's long-term prospects were given a boost when Continental Grain Company, a massive agribusiness and financial services conglomerate, acquired a majority interest in PSF. Following the acquisition, PSF was incorporated into Continental Grain's operations, which included pork production facilities already owned by the company.

Origins

From the start, the realities of PSF's business belied its ambitious aspirations. The company began business in the basement of a building that was later home to the Snappy Convenience Store, carrying a payroll of three people. It was a modest start for a company plotting to revolutionize the pork production industry, but PSF's founders were wholly determined to do just that, no matter the extent of the climb that lay ahead. Dennis Harms and Tad Gordon were motivated by a vision, convinced industry preeminence awaited a hog producer who used state-of-the-art technology to produce superior quality pork in an efficient manner. The pair theorized that customers would welcome the same consistency and quality in pork that characterized the product produced by the chicken industry. They envisioned a hog farm employing the latest technology and supported by vertically integrated operations, which would give them control over every aspect of the pork production process, from the artificial insemination of the sows to the packaging of a pork chop. By controlling the breeding, raising, slaughter, and packaging of pigs, Harms and Gordon believed they could deliver consistency and quality to customers and achieve greater profitability through the advantages wrought by vertical integration. But the financial requirements for creating a comprehensive, technology-driven enterprise were heavy. The essential necessity for turning a dream into reality was capital, and a substantial amount of it.

Prior to founding PSF in 1988, Harms was employed as a grain salesman, a profession that provided little experience in securing the substantial start-up money PSF would need. Gordon's previous professional experience, however, was suited perfectly to fulfill the company's most pressing need. Gordon was a Wall Street investment banker, schooled in the particulars of high finance and familiar with the most powerful merchant bankers in the country. From his perspective, Gordon saw a highly fragmented pork industry that lacked the technological sophistication prevalent in the chicken industry, a promising business opportunity begging for a properly equipped, new contender for market dominance. It was a perspective he shared with acquaintances working on Wall Street, as he tried to convince investors to financially support the concept he and Harms had created. As Harms concentrated on setting up operations at the junction of U.S. Highway 136 and U.S. Highway 65, welcoming the arrival of the first pig in July 1989, Gordon pitched the PSF vision on Wall Street. The unusual partnership of a grain salesman and a Wall Street investment banker was made stranger when New York City-based Morgan Stanley & Co. agreed to financially support the fledgling Missouri hog farm. PSF entered the 1990s with the resources to actualize Harms's and Gordon's vision.

According to the vice-chairman of Morgan Stanley, Bob Niehaus, the venerable investment bank agreed to financially support PSF's assault on the pork industry because it saw "the industry was fragmented and the opportunity was there for a consolidator with the right formula." Morgan Stanley's merchant banking division believed Harms and Gordon had articulated the right formula, and the money came pouring in. With a steady stream of cash, Harms and Gordon began building facilities for a fully integrated, state-of-the-art pork production operation in northern Missouri, aiming to create an 80,000-sow farm capable of carrying swine from birth to individual packages of pork displayed at retail locations. Futuristic hog barns were constructed, facilities with "biosecurity" standards that required individuals to shower, scrub down, and wear special, germ-free suits before entering to prevent disease. Feed mills were constructed, a packing plant was built, and computers were put into service, armed with software that monitored a pig's development from birth until it reached the slaughter weight of 250 pounds at 11 months. The pigs moved through a series of buildings, fattening as they progressed through PSF's scientifically based development program, ending their one-way journey after passing through Harms Way (named in honor of Chief Executive Officer Dennis Harms) and into the packing plant. With Morgan Stanley's financial support, Harms and Gordon built other facilities. A Genetic Improvement Facility was erected, headquarters were expanded--sporting what one visitor described as a "magisterial entrance" that included a waterfall, and an elaborate employee training center was established. By the early 1990s, what had started as a dream was rapidly turning into reality.

Between 1991 and 1996, Morgan Stanley, the majority owner of PSF, invested or raised more than $500 million to fuel the company's drive to become the largest hog farmer in Missouri and one of the largest in the country. As the early 1990s progressed, PSF climbed the industry rankings, blossoming into a national force. By 1994, the company was prepared to expand upon its original operations in Missouri and establish additional hog operations elsewhere.

Mid-1990s: Financial Disaster Looms

In early 1994, PSF acquired National Hog Farms of Texas, an 18,000-sow farm located in the Panhandle of Texas. Later in the year, the company opened what it touted as the U.S. meat industry's most advanced pork processing facility. The 300,000-square-foot operation, located in Milan, Missouri, was capable of processing more than 1.7 million hogs annually, the targeted capacity of the company's Missouri hog operations. The capacity of the company's Missouri operations, which was reached in early 1995, was the same capacity Harms and Gordon planned for hog operations in Texas, an expansion project that was under way by early 1995. The company had 53,000 acres set aside in Texas, intending to spend $250 million to develop another pig farm capable of producing what one industry observer described as "cookie-cutter" hogs. In the spring of 1995, contractors began the exhaustive task of establishing the infrastructure for the Texas farm. Roads were built, foundations were poured, and a network of water and sewer lines was buried beneath the soil. Before the work was completed, however, the entire project came screeching to a halt. On May 1, 1995, the contractors were told to stop working, informed by PSF that work would resume in two weeks. Shortly thereafter, the contractors were told the postponement was indefinite. The rapid pace of PSF's expansion had collapsed, its sudden stop signaling the outbreak of profound problems for the ambitious company.

As became readily apparent when construction activity ceased in Texas, PSF's strident expansion had been ill timed. The company had invested hundreds of millions of dollars in new equipment and facilities and launched an aggressive foray into Texas, positioning itself to capture a sizable portion of the U.S. market and the international pork market. Meanwhile, conditions within its industry deteriorated. In 1994 and 1995, hog prices plummeted to levels averaged during the mid-1970s. Exacerbating depressed hog prices was the inflated price of corn, the animal's staple feed, which rose to a record high in the mid-1990s. All competitors in the pork industry suffered from the deleterious conditions, but perhaps none more than PSF. The company was highly leveraged, financing much of its aggressive growth through $420 million in junk bonds, and consequently was highly vulnerable to the depressed market conditions. It became increasingly difficult for the company to make the interest payments on its mounting debt, as losses piled up. Between January 1995 and September 1995, PSF registered $66 million in losses, more than twice the amount recorded during the same nine-month period in 1994. By the end of 1995, losses for the company neared the $100 million mark. As PSF entered 1996, the company's future existence was seriously in doubt.

In attempting to determine what had gone wrong at PSF, industry observers did not have to scrutinize the pork producer's operations long. Costs had spiraled out of control, propelled by the company's desire to create a pork production enterprise that would serve as the model for all others to follow. "They built a Rolls-Royce when a Chevrolet could have gotten them there," one competitor remarked. For its part, the company conceded that the aggressive expansion program had backfired, becoming hobbled by debt when hog prices plunged and the price of corn rose. "We tried to do too much too soon too fast," offered a vice-chairman at Morgan Stanley. By May 1996, PSF, which had grown to become the fourth largest pig farmer in the United States, could no longer pay the interest on its debt. In July 1996, the company filed for bankruptcy, seeking protection from creditors while it restructured its operations and resolved the problems that had led to its collapse.

A Second Start in 1996

While management grappled with the formidable task of preparing for PSF's survival, several industry analysts theorized that the company's long-term health depended on its acquisition by a larger parent company who could incorporate the hog operations into its existing business. Of more pressing importance to PSF's reorganizers in the summer of 1996 was emerging from bankruptcy, a process that was accelerated by the company's early development of a restructuring plan, which was approved by investors, lenders, and other parties prior to filing for Chapter 11 protection. Restructuring permitted PSF to convert some of its debt into equity, enabling the company to achieve a greater distinction between the $246 million in assets and the $237 million in liabilities it registered when filing for bankruptcy. The restructuring process also led to an ownership change in the company. Under the arrangement, Putnam Investments, a company whose fund held a sizable percentage of PSF's junk bonds, became the largest shareholder in the Missouri and Texas hog operations, replacing Morgan Stanley as PSF's largest shareholder. Two months after filing for bankruptcy, PSF had completed its reorganization, emerging as a going concern in September 1996. Shortly after the company's second start, the public learned of PSF's new senior executive, the individual whose responsibility it was to steward the fortunes of what continued to rank as the country's fourth largest hog farmer. Robert Manly, formerly the executive vice-president of Virginia-based Smithfield Foods Inc., was announced as the president and CEO of PSF.

Following the severe disappointment of 1996, PSF forged ahead, seeking to make its second assault on the pork industry an enduring one. There was evidence that the company was progressing successfully during the late 1990s. The $250 million in annual sales recorded when the company declared bankruptcy had grown to $295 million by 1997, sparking a modicum of optimism about the company's future. More encouraging news arrived in 1998, when PSF allied itself with a much larger partner and bolstered its chances for long-term success.

In May 1998, Continental Grain Company, one of the world's largest grain concerns, acquired a majority interest in PSF. Continental Grain, with interests in financial services and a number of agribusiness pursuits, entered the pork production business in 1985, maintaining pork production facilities near PSF's operations in Missouri. Following the acquisition, Continental Grain's Missouri pork operations were incorporated into its new 51 percent-owned subsidiary. In addition to Continental Grain's pork operations, PSF also gained the services of its parent company's vice-president and general manager of pork operations, John Meyer. Meyer was named CEO of PSF, working alongside Manly, who remained as president of PSF and assumed responsibilities for the day-to-day operation of the company. Together, Meyer and Manly hoped to carve a legacy of success for PSF, which, having weathered an overly ambitious start in business, boasted the equipment and facilities to dominate its industry.